Rizal Commercial Banking: Benign Fundamental Momentum Though Earnings Quality Is a Caveat

Gravity Works As WeWork Doesn't; Now Plan B

Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

Rizal Commercial Banking / Equity Bottom-Up

Though not in the same league as top markets such as Pakistan, Turkey, or Egypt, Philippine banks are commanding better than average VFM Scores (Valuation, Fundamentals, Momentum). The market in general is not expensive versus long-term valuations, at least on a CAPE basis. (Trading at a 25% discount to average CAPE). We highlighted recently the merits of CHIB and add Rizal to our list of candidates for a small-cap GEM portfolio.Rizal dedicates itself to mainly corporate credit (69% of Loan book) and to a lesser extent consumer segments (31% of credit), backed by source of funding balanced by Savings-heavy CASA (56% of Deposits) and by time deposits (43%).FY20/19 results show robust fundamental trends. There were improvements in NIM/Spread, in Efficiency, in Capital Adequacy, in Liquidity, and in Provisioning. There was though deterioration in headline Asset Quality, characteristic of the System in general, while Profitability saw only lightweight erosion. The bottom-line was supported by firm “Core Income” growth, rooted in much lower Interest Expenses, combining with Margin and Efficiency gains, and with a steady contribution from non-core streams, which together more than offset a jump in LLPs which reduced Comprehensive Income growth to 78% YoY. Earnings Quality remains subpar at Rizal with its dependence on trading gains. However, progress on Efficiency, Capital Adequacy and Liquidity is highly encouraging. The bank’s toxic exposures are covered by loss-absorption buffers.<div class="content-highlight">A FV of 6%, a PBV of 0.33x, a Dividend Yield of 3.2%, an Earnings Yield of 16.8% are not unappealing, reflecting more growth of risk than risk of growth. On the latter, we are quite sanguine. Globally, Rizal commands a top decile VFM Score™ and a top quartile PH Score™ (7.8) : the latter  captures benign value-quality trends, including a supportive valuation variable. The VFM ranking encapsulates Fundamental Momentum, Valuation, and Technicals.</div>

Though not in the same league as top markets such as Pakistan, Turkey, or Egypt, Philippine banks are commanding better than average VFM Scores (Valuation, Fundamentals, Momentum). The market in general is not expensive versus long-term valuations, at least on a CAPE basis. (Trading at a 25% discount to average CAPE). We highlighted recently the merits of CHIB and add Rizal to our list of candidates for a small-cap GEM portfolio.Rizal dedicates itself to mainly corporate credit (69% of Loan book) and to a lesser extent consumer segments (31% of credit), backed by source of funding balanced by Savings-heavy CASA (56% of Deposits) and by time deposits (43%).FY20/19 results show robust fundamental trends. There were improvements in NIM/Spread, in Efficiency, in Capital Adequacy, in Liquidity, and in Provisioning. There was though deterioration in headline Asset Quality, characteristic of the System in general, while Profitability saw only lightweight erosion. The bottom-line was supported by firm “Core Income” growth, rooted in much lower Interest Expenses, combining with Margin and Efficiency gains, and with a steady contribution from non-core streams, which together more than offset a jump in LLPs which reduced Comprehensive Income growth to 78% YoY. Earnings Quality remains subpar at Rizal with its dependence on trading gains. However, progress on Efficiency, Capital Adequacy and Liquidity is highly encouraging. The bank’s toxic exposures are covered by loss-absorption buffers.A FV of 6%, a PBV of 0.33x, a Dividend Yield of 3.2%, an Earnings Yield of 16.8% are not unappealing, reflecting more growth of risk than risk of growth. On the latter, we are quite sanguine. Globally, Rizal commands a top decile VFM Score™ and a top quartile PH Score™ (7.8) : the latter  captures benign value-quality trends, including a supportive valuation variable. The VFM ranking encapsulates Fundamental Momentum, Valuation, and Technicals.

Rizal: Excessive Amount of Risk Priced In